RELIANCE ON NEW PROCEDURES ALLOWED
SOME FALSE ECONOMIC STIMULUS PAYMENTS TO BE ISSUED AND POSE A CONTINUING RISK
OF FALSE REFUNDS BEING ISSUED IN THE FUTURE

Issued on March 25, 2009

Highlights

Highlights of
Report Number: †2009-10-049 to the
Internal Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

The Internal Revenue Service (IRS)
distributed 119.2 million stimulus payments totaling $96.3 billion during
2008.† However, we identified $1.2
million in false stimulus payments and $16.3 million in false refunds that were
inappropriately issued due to reliance on new controls that did not work
effectively.† Although the amount of
erroneously issued stimulus payments is small in relation to the total amount
issued, TIGTA remains concerned that the existing controls pose a risk that
false refunds and stimulus payments will be erroneously issued in the future.† Allowing false stimulus payments or false
refunds to be issued reduces the dollars in the United States Treasury, which
is especially critical in this current economic environment.

WHY TIGTA DID THE AUDIT

The
objective was to evaluate the effectiveness of the Criminal Investigation (CI)
Divisionís actions to prevent the issuance of economic stimulus payments for
tax returns identified by the IRS as claiming false refunds.† The audit was conducted as part of TIGTAís
risk-based audit coverage of the CI Division addressing the major management
challenge of Erroneous and Improper Payments.

WHAT TIGTA FOUND

While the CI
Division actively participated in the IRS-wide planning process, the Action
Plan submitted did not adequately ensure that stimulus payments were not issued
on known false returns.† After bringing
these concerns to managementís attention, the IRS took immediate corrective
action.† As a result of these changes,
TIGTA estimated that $7.1 million in stimulus payments on false returns were
prevented from being issued.† TIGTA also found
that the CI Division generally relied on new procedures to prevent payments
associated with false returns from being issued.† However, TIGTA identified $1.2 million in
stimulus payments and $16.3 million in false refunds that were inappropriately
issued because the temporary freeze was released due to processing delays or
systemic deficiencies.† TIGTA estimates
that approximately $117.6 million in false refunds could be erroneously
released over 5 years due to the expiration of the temporary freeze within the
established time periods.† Finally, TIGTA
estimates that more than $138 million in stimulus payments on false returns
that were not issued in 2008 may be at risk of being issued during 2009 if
false returns for these taxpayers are filed during 2009.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the IRS extend the time to verify potentially false returns and
prevent the issuance of false refunds, establish a quality review process to identify
false refunds not timely processed to or updated on the computer system used to
control false returns, and seek a Counsel opinion to determine whether a rebate
recovery credit calculated by the IRS requires a statutory notice of
deficiency.†

In
response to the report, IRS management agreed to request a formal written
opinion from Chief Counsel.† IRS management
disagreed with the other recommendations, stating that the prior manually
intensive process was replaced with an automated, streamlined process that
negates the need for manual intervention and that it continues to monitor and
take proactive steps to refine processes to hold the refund until all issues
are resolved.†

However, in spite of the IRSí new
automated process and other freeze conditions, TIGTA identified instances where
false refunds were erroneously issued due to the expiration of the temporary
freeze within the established time periods.†
TIGTA also identified control weaknesses in the CI Divisionís
processes.† The CI Division outlined
several improvements it has made to monitor the referral process and ensure
issues are timely resolved.† While TIGTA believes
some of the actions taken by the CI Division could be an improvement, these
actions will not be implemented until Processing Year 2009. †As a result, TIGTA cannot comment on their
effectiveness.† In addition, if the IRS
does not take corrective actions, the IRS will continue to be at risk of
allowing false refunds to be issued.† TIGTA
remains concerned that the programmed expiration for the temporary freeze may
not give the IRS sufficient time to verify wages and refer false refunds for
resolution.

READ THE FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to